BT needs to be engaged or investors will hang up

On Thursday evening, I went to a preview screening of Quantum of Solace, the
disappointing new James Bond film, hosted by BT.

By Mark Kleinman

10:15PM GMT 01 Nov 2008

And like 007, the telecoms giant's investors quickly discovered that supposedly safe havens are not so safe any more. There was certainly little solace to be sought in BT's ghastly profit warning on Friday.

The share price was hammered as a consequence of BT's admission that revenues in its Global Services arm – the part which delivers IT and telecoms solutions to corporate customers – were "disappointing". With the stock having slipped to its lowest level since BT's flotation in 1984, the final dividend must now be under threat of its own downgrade.

This kind of performance is demonstrably not why investors own stock in a utility-style company like BT. Ian Livingston, BT's new chief executive, has only been in the job a few months, but Friday's alert to the market suggests he has a much tougher job on his hands than it appeared when he was crowned by his predecessor, Ben Verwaayen.

On Friday, Livingston showed he could be ruthless in wielding the axe, turfing out the head of the Global Services arm and installing in his place Hanif Lalani, the group's finance director.

That won't be enough. Although he company's other major businesses are doing fine, Livingston will need to eke out every bit of margin-growth he can and show that BT under his watch will be focused on profitable sales rather than sales alone.

But this is not the time to be considering more radical action, such as a break-up of the group. Two years ago, perhaps, with Global Services and Openreach firing on all cylinders, and with the debt markets bending over backwards to lend exorbitant sums to buyout groups, a sale of the business would have made more sense.

For now, Livingston should also be putting other potential strategic moves, such as a wholesale re-entry into the mobile business, on the back burner. On the evidence of Friday morning, Livingston will need to perform an escape act worthy of Bond himself if his tenure at the helm of BT is to prove successful.

Barclays exposes Gulf with rivals

The price of independence can be a heavy one indeed. Barclays' £7bn fundraising from a group of Middle Eastern investors may have thumbed a nose at those who doubted its ability to raise capital privately during tumultuous times, but it has rightly left many people surprised at the lengths to which it has gone to achieve it.

There are reasons to be sceptical about chief executive John Varley's excitement over the potential for future revenues pouring in from Abu Dhabi and Qatar. True, the investments will give the British bank an important seat at the table in two of the world's most capital-rich countries during a worldwide squeeze that will see capital allocated sparingly, if at all.

But look back to last year's injections from Chinese and Singaporean government-backed funds, accompanied by the same triumphalist predictions about intimate commercial relationships helping Barclays to gain an edge over rivals in faster-growing Asian economies.

Since then, there has been little evidence of even much groundwork being done to achieve such an ambition. In China, a commodities trading joint venture represents the main fruit of the investment from China Development Bank, and if anything, the prospect of a privileged relationship is more remote now than before Barclays persuaded Beijing to pay 720p-a-share for its initial shareholding.

Despite the promise of a seat on the Barclays board, the Governor of CDB has been unable to take it up because of bureaucratic hurdles back home. I am told that relations between the institutions which have begun investing China's vast hoard of foreign exchange reserves and government officials have been badly strained by the huge paper losses incurred as global equity markets have collapsed.

In fairness, those losses are not unique to Barclays: name any investment in an international bank by a sovereign investor during the past 18 months, and there has been very little cause for celebration for any of them. So the Chinese experience suggests we should be careful before assuming that Varley and Co will suddenly have their own Silk Road through the Middle East.

Yet remaining free of Government shackles should have undoubted long-term benefits. As I wrote two weeks ago, Barclays' efforts to secure its additional capital privately were laudable, if only for the reason that the more of Britain's banks which can retain their freedom to take advantage of the eventual upturn in the global economy, the better.

If, over the next few months, a large Asian bank finds itself in need of emergency capital from a rival, which is more likely to be able to provide it: a Government-controlled British lender or one with the commercial freedom to exploit new investment opportunities?

To suggest that Barclays is avoiding the Government shilling to allow it to pay large bonuses is left-wing nonsense. I expect that the likes of Bob Diamond, the bank's president, and colleagues will be restrained when year-end remuneration is discussed – and Barclays' non-executive directors will not be sanctioning mega-bonuses this year anyway if they have any sense.

Over the next few days, we will see HBOS, Lloyds TSB and Royal Bank of Scotland publishing the prospectuses for their Government-led fundraisings. They will not make happy reading. As we report elsewhere today, RBS is likely to give warning that its profits will be significantly below City expectations. HBOS will have to announce further writedowns based on the declining quality of its Treasury assets.

The picture for the British banking sector remains bleak. But it would be bleaker still if the entire industry had been nationalised. Varley has shown restraint in the past when it mattered, and given that he has been forced by regulators to raise this additional capital when his situation was nothing like as dire as that of his rivals', he should be given the chance to prove that it can be put to work effectively.

Better off 'dead' for the banks

Further evidence of the pain that is spreading throughout the wider economy is coming thick and fast at the moment, but many finance directors are still not showing enough urgency when it comes to preparing for debt refinancings that may still be a year or more away.

A note published last week by Collins Stewart's insightful Quest analysts made the following point: "Any financially distressed PLC which is worth more 'dead' than 'alive" could well be seen as a useful source of capital for a bank."

On its watchlist of companies trading at discounts to their wind-down ratio are household names like Premier Foods, Taylor Wimpey and Woolworths. These are worrying times indeed.